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Exchange Rates I: The Monetary Approach in the Long Run Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth
Exchange Rates I: The Monetary Approach in the Long Run Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, whereas the Bank of Korea chose to maintain relatively high money growth of 15% per year. For the following questions, use the simple monetary model, in which L is constant. You will find it easiest to treat South Korea as the home country and Japan as the foreign country. a. What is the inflation rate in South Korea? Korean inflation rate: b. What is the inflation rate in Japan? Japanese inflation rate: % c. What is the expected rate of depreciation in the Korean won relative to the Japanese yen
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